Crunch Time For Greenspan's Great Experiment With the Global Economy

The financial sales pitch for 2005 was “Everything’s Coming Up Roses.” That’s the line they fed us day after endless day on MSNBC, CNBC, CNN in all the pop-econ infomercials disguised as economic analysis by “experts.” It turned out that even the stock market, the main paper asset venue they were selling us, was completely flat, which means that, after inflation and puffery fees, you lost about 5% of your money on average if you bought all that hot air. (Fortunately, I am not a wild speculator who buys hot paper assets.) Now even the hot air sales folk on TV are trimming their sails a bit, promising us a touch of utopia early this year — so you should buy, buy, buy right away! — but a bit of a bummer later in the year.

The more mundane truth is that last year was great for the rich and for those of us owning million dollar houses in red hot real estate balloon markets, flat for the average American, and ever more dismal for the lower half of the income distribution as their real incomes shrank, inflation ate up all nominal (name only) economic growth (once you factor in the soaring real estate and pension costs).

Dick Cheney and the hot paper asset touts insisted that the year was one of “solid economic growth” that has set the stage for endless prosperity, onward and upward with the paper money supply. But that’s because they use single-entry bookkeeping: for them, “deficits don’t count!” The immense deficits and debts the government and individuals ran up are not counted at all in their primitive accounts. All that counts are the positive growth numbers. And those are to be taken at face or nominal value, with no real consideration of real inflation rates and no discounting of current returns by debts, interest rates, and inflation rates over all the years we will be paying them in the future.

The obvious fact is that this “Boom Time” they keep touting has been produced by four years of Fed central planning of real interest rates below zero, the shifting of trillions of dollars of assets from the saving and investing middle classes to the consumers, the rich and the giant corporations (especially the giant financial institutions working with the Fed to play the interest rate curve to vastly expand their corporate coffers at the expense of the middle classes for many years to come), the running up of federal deficits that are still officially $350 billion and will soar in the future (unless we get a vast explosion of real growth), and the U.S. is running up nearly $800 billion a year in foreign debt (mainly in Treasuries that will have to be repaid over many years).

These soaring debts are coming at the top of the Greatest Financial Bubble in history, the American-Chinese Great Bubble, generated by all those years of negative real interest rates that led to a vast explosion of paper money and borrowing to consume, much of it pouring into Real Estate Bubbles in the U.S. and many other nations like Australia soaring on its exports of commodities to China. The Great Bubble has produced immense financial distortions in the global markets that are still growing, though the Bubble seems to be rapidly settling down and could begin crashing at any time.

The “Boom” they are touting is actually, then, a flat economy on average (with a big bump at the rich end and a big hole at the poorer end) at the top of the Greatest Financial Bubble in history that now appears to be settling down, plateauing. This is not the game plan of Greenspan and the central planners at the Fed and other central banks worldwide. Their central plan was for the negative interest rates, vast deficits and debts to set off an investment boom that would send real growth rates soaring, thus paying off the immense loans and leaving us sailing off into the sunset with eternal, real prosperity. Greenspan and his replacement, Bernanke, are no doubt biting their fingernails right now waiting for that Coming of Financial Godot. They know the Great Experiment they have been running on our global economy has to pay off now or we will begin careening downward and face a terrible Crash of global financial markets which will probably lead to a locking up of the $500,000,000,000,000 in financial derivatives contracts the big financial institutions and corporations have run up.

Even if everything were coming up roses, this would be a very scary time for anyone who understands the real financial situation we face because the Greenspan Central Economic Plan was betting on perfection, a vast and permanent explosion of real economic growth. There is not a hint of any of that. But the truth is immensely worse.

The vast Real Estate Bubbles are beginning to leak, the economy is oscillating downward slowly already, inflation is soaring, pension funds are collapsing, debts are still soaring, the price-to-dividend ratio of stocks is so absurdly high that no one dare mention it and the stock market is flat, soaring energy costs are still trickling through the whole economy, and consumers look like they are so indebted they are feeling “tapped out” and ready to start saving again. Greenspan and his fellow central planners know that there is a point beyond which any amount of negative real interest rates will not be able to “push” consumers into consuming.

They cannot push nominal rates down to zero, the point they came awfully close to a few years ago. Now people have such immensely more debt, any new Fed attempts to “push” consumption by going down to near zero will probably not work because people would be facing an ever deeper black hole of debt. For many months last time I was not sure whether the near zero Fed funds rate would “push” people into consuming enough to stop the Crash we had entered. It finally did, but it was scary. Trying that again with these immensely greater debts after an immensely greater global Crash would very likely prove a fool’s last gasp of mad central planning. And, if so, we would be staring into an economic abyss that few people can imagine. There is no big economy out there to save us, as the U.S. and Europe saved the Russians from plunging into an abyss. With that utterly immense overhang of one half quadzillion derivative contracts and all those trillions in debts suddenly locking up, I have no idea what would happen and I don’t think anyone else does either. That’s why they call it a Black Hole, an abyss you cannot see into.

You may not even know that you have been a little part of the Greatest Experiment in Economic Central Planning in history, an experiment vastly exceeding any central planning Gosplan did in the Soviet Union in that vast disaster of central planning that led to the implosion of the Evil Empire. If not, you may especially resent paying for the outcomes of that experiment if it fails.

If we do not now see a vast explosion of real rates of productive investment that lift all our stagnating and sinking boats, the bill for you and all of us will be utterly immense. So let us pray that Central Economic Planning by the Fed works a lot better than any other central planning has done. Three cheers for Central Planning! I’m not kidding. I’ve always warned that the central planning of our economy through the Fed planning of the money supply would prove disastrous in the long run. But in this situation I pray I may be proven totally wrong. We desperately need this Central Plan to work. If it does not, run for the hills.